1970 HEWLETTPACKARD

COMPANY ANNUAL REPORT

Hewlett-Packard report for the fiscal year ended October 31, 1970

FINANCIAL HIGHLIGHTS

1970 1969

Net sales $347,322,000 $323,780,000

Other income, net 4,204,000 1,757,000

Total income 35 1,526,000 325,537,000

Cost of goods sold and operating expense 198,690,000 179,877,000

Selling, administrative and general expense 107,083,GOO 91,222,000

Provision for federal and foreign income taxes 22,650,000 28,853,000

Net income 23,103,000 25,585,000

Net income per share $ .90 $1.01'

I William R. Hewlett

TO OUR SHAREOWNERS

1970 was a difficult year for the nation's elec- tronics industry and for Hewlett-Packard as well. Although our company weathered the effects of the economic recession better than many firms in the in- dustry, our overall performance was well below our expectations at the beginning of the year. There was a considerable weakening of domestic markets for electronic test equipment, and as a consequence our sales within the U.S. declined for the first time in 16 years. On a more positive note, our international business continued to grow significantly and served to mitigate the effects of the domestic recession on sales and earnings.

For the corporation as a whole, sales totaled $347,322,000, a gain of 7% over the previous year. Net earnings declined 11% to $23,103,000, equal to 90 cents a share on 25,649,111 shares of common stock.outstanding at the end of the year. This com-

pares with $1.01 a share on 25,299,462 shares out- standing in fiscal 1 969.

Figures relating to number of shares and per- share earnings for 1969, as well as for previous years, have been restated in this report to reflect the com- pany's two-for-one stock split that occurred in fiscal 1970. The split was effected by shareowner approval in February of an increase in the number of author- ized shares from 15,000,000 to 40,000,000 shares. The dividend rate of 10 cents a share, paid semi- annually, was retained on the increased number of shares.

An analysis of incoming orders during 1970 il- lustrates the marked contrast between our domestic and international business. Domestic orders totaled $211,844,000, down 12% from the previous year. On the other hand, international orders were up 32% to $1 38,554,000. Because of this large international increment, we were able to achieve a slight gain in our total incoming orders-from $344,395,000 in 1969 to $350,398,000 in 1970.

Last year we reported that the percentage of our total business that is related to U.S. government spending was steadily declining. This trend continued during 1970. Orders traceable to government fund- ing, whether emanating directly from government agencies or from private organizations with govern- ment contracts, represented less than 25% of our total orders.

The general decline in our domestic business was a significant factor in reducing profit margins for most of our operating divisions. For the company as a whole, our after-tax margin dropped from 7.9% on sales in fiscal 1969 to 6.7 % in 1970.

As the year unfolded, incoming order rates for a number of our domestic divisions began to fall con- siderably below their ability to produce. This im- balance between order and production levels led to some reduction in backlog and a rise in inventories. The inventory buildup necessitated some further use of our short-term borrowing capacity. Early in the third quarter borrowings had risen to nearly $36 million from $20.5 million at the beginning of the fiscal year.

In July, to bring our production more into line with current order rates and improve our inventory and backlog position, we initiated a 10 percent work reduction in most of our U.S. plants. The pay of the 11,000 employees affected, including all corporate

officers, was reduced accordingly. We considered this program a more effective and equitable method of low- ering production than by initiating a layoff that might have affected as many as 1,000 people. As employment levels have declined due to normal attrition, and as business conditions have warranted, we have allowed individual divisions and groups to return to full work schedules. We expect, at the time of preparing this report, that the entire company will be back on a full schedule by the beginning of the calendar year.

Largely as a result of the work reduction pro- gram, we have been able to control the inventory buildup and, in fact, have seen some decline in inventories in recent months. Borrowings have also been reduced from their mid-year peak. Moreover, although it is not reflected in the balance sheet, we have been able to avoid the deleterious effect of a lay- off on employee morale and on the company's fun- damental strength and stability.

Several other steps were taken during the year to reduce costs and to maintain reasonable profit margins in the face of a weakening economy. At the beginning of the year we had expected our capital expenditures to amount to about $33 million. ferring several building programs and reducin Bb projected investment in new machinery and equip- ment, our actual expenditures amounted to $26.2 million. This compares with $27.4 million in fiscal 1969.

Some building projects were under way at the beginning of the year and we considered it prudent, in view of our long-term needs, to complete them. These included, in the United States, a new plant for our San Diego Division and additions to existing facilities in Stanford Industrial Park and in Loveland, Colorado. Overseas we completed an addition to our plant in West Germany, and are currently adding 100,000 square feet to our plant in Scotland.

Because of the continuing strong demand for our products in Europe, we also announced, late in the year, plans to acquire a 45-acre plant site in Grenoble, France. We expect to develop the site into a major facility for product development and manufacture, with the first unit to be constructed within the next two years.

Our research and development expenditures amounted to $37.2 million in 1970, representing 10.7% of sales revenue. We believe expenditures approximating this level will be appropriate for our

product development activity in 197 1. Several of the new instruments and systems generated by our R&D programs this past year are described on the pages following this letter. Some of these products are aimed at our traditional test instrumentation markets, while others, such as a laser interferometer and a distance measuring device, are opening up entirely new markets for the company. All are expected to add an important increment to our sales volume in 197 1 and the years beyond.

Our data products activity, which includes the design and manufacture of computers, calculators and their peripheral equipment, continues to repre- sent an increasingly important part of our overall operations. Shipments of data products totaled $64.5 million in 1970, up 34% from the previous year. Profit margins also improved as volume increased.

The recession had a marked effect on domestic data products markets this past year, slowing their growth and making them more competitive. Never- theless, we were able to strengthen our position in a number of areas. Of particular significance is the educational field, where our computers, calculators and time-sharing systems are finding increasing use as

tional aids in schools, colleges and universities. o are serving a broader base of customers in

ma 9 y industrial and commercial markets where most computational needs can be met with small, easily programmable computers offering high performance at reasonable cost.

Among the data products introduced in fiscal 1970 are two new computers providing twice the mainframe memory capacity of previous models. The result of core memory technology developed in our own laboratories, the computers have effected a major improvement in price-performance ratio. They also serve as the heart of a new time-sharing system pro- viding simultaneous use of up to 32 terminals.

The market for our desk-top calculators and their peripheral products is continuing to grow at a very satisfactory rate. Sales of calculators and calcu- lating systems were up appreciably over 1969, and were enhanced by the introduction of an extended memory device that materially increases the calcula- tors' problem-solving capabilities. As with our com- puters, demand for calculator products is particularly strong in Europe and other international markets.

Another segment of our business that is increas- ingly important to our long-term growth and profita-

bility is what we call our "systems business:' This involves the combining of several instruments with a sophisticated controlling mechanism, usually a compu- ter, to create a versatile, highly automated system. The system can quickly perform a vast number of com- plex measuring, testing and data processing tasks to meet a customer's specific automation requirements.

This past year we consolidated virtually all of our measurement systems activity into a single oper- ating unit, the Automatic Measurement Division. Lo- cated in Palo Alto, this division now has broad engi- neering capability and, by developing its own field sales force, is strengthening our position in a highly promising market.

Last year we reported that we were restructuring our field sales organization to reflect the growing di- versity of our products and markets. This effort was essentially completed in the latter part of 1970 and is now being fully implemented in the field.

Under the new structure we have eight special- ized groups, each concentrating its selling efforts on a specific group of products. The product categories include medical, analytical, computer, calculator, distance measurement, and-within the traditional electronics group-instruments, components and sys- tems. Although each sales team is largely self-suffi- cient, we have retained a strong regional marketing management to coordinate activities and to maintain a close relationship between factory and field.

Overall responsibility for our marketing effort lies with Robert L. Boniface, who was elected a vice president of the company in 1970. Mr. Boniface brings more than twenty years of HP field marketing experience to his new corporate post, and we are confident that under his direction the new organiza- tion will serve our customers and the company more effectively and will provide a good base for future growth and diversification.

The product-oriented marketing structure also is being implemented overseas and is expected to be particularly effective in Europe, where we have a wide diversity of markets and opportunities. This past year our European orders amounted to $94 million, up 35% over fiscal 1969. Gains occurred in 41 major product areas and in all major markets.

Outside Europe our international business was up 27%. In Japan, one of our most important mar- kets, our position was enhanced by the continued

growth and progress of Yokogawa-Hewlett-Packard, Ltd. Sales for this Japanese affiliate totaled $16.7 million, a 27% increase over 1969, and earnings rose 31% to $1.4 million. Our 49% share of YHP's earnings has not been included in the accompanying financial statements.

A significant development in the Far East dur- ing 1970 was the establishment of a small operation in Singapore for the assembly of computer core mem- ories and other specialized components. Prior to set- ting up this operation, we had to depend on outside sources for our core memories, all of which were as- sembled in Taiwan, Hong Kong and other overseas locations. Our new Singapore subsidiary is off to an excellent start and is enabling us to overcome serious cost disadvantages in the production of computers and calculators. Further economies are expected as we introduce improvements in product design and manufacture that will take advantage of the unique characteristics of our own components.

Although the output of our overseas manufac- turing plants is increasing each year, exports from our factories in the U.S. also continue to climb. In 1970, for example, exports totaled $86 million, up 37% over the previous year. Thus our expanding interna- tional business helps to create jobs in our domestic plants, and adds a useful increment to our country's balance of payments as well.

At the end of the fiscal year we had 3,370 people employed overseas. For the corporation as a whole, employment totaled 16,000. Because of cur- rent business conditions, we are keeping a careful watch on employment levels and adding new people only in those areas where it is clearly warranted. We also are accelerating our personnel development and training efforts as a means of improving productivity and enabling more people to upgrade their skills and capabilities. During this past year more than 3,500 employees participated in some type of job-related educational or training program. Of this number, 900 were enrolled in courses at outside colleges and universities.

With the leadership of our management people, we are strengthening our commitment to broaden op- portunities for minorities and other less advantaged groups in our society. Affirmative Action programs are in effect throughout our plants and offices to assure advancement opportunities for qualified mi- nority personnel and to assure, as well, that when we resume normal hiring, minorities will represent a

a fair share of our new people. In addition, the com- pany is continuing to financial aid, loaned executives and other resources to various outside groups working to alleviate minority problems.

On November 30, shortly after the end of the fiscal year, we suffered a very real loss with the death of W. Noel Eldred, long a key member of our man- agement team. Noel had joined Hewlett-Packard in 1944 and, prior to becoming an executive vice presi- dent and director in 1969, had headed our marketing operations for more than 20 years. He was a friend of great warmth and understanding, and an exceptionally gifted manager who was instrumental in shaping the philosophy of the company and guiding its growth. He will be sorely missed.

We also are sorry to report the recent resigna- tion of Dr. Philip R. Lee from our board of directors. Dr. Lee, chancellor of the University of California Medical Center in San Francisco, found it necessary to resign because of an irreconcilable conflict between our board meetings and meetings of the University's board of regents.

Looking to the future, we do not expect, i of the current economic climate, that we will ence any marked upturn in our domestic busines q in 1971. Our international business is expected to con- tinue to grow, but it may be at a somewhat slower pace than we have seen in the past few years. As a consequence, it will be difficult to achieve any sub- stantial increase in our overall volume.

As for the long-term outlook, we remain gen- erally optimistic. Our financial condition is sound and we have emerged from the trials of the past year as a leaner, better organized company, one that is pre~ared to move quickly in fulfilling changing cus- tomer needs. We have a number of promising new products coming from our laboratories, and the capa- bility to manufacture and market them effectively. These are strong, positive factors that will enable us to take good advantage of any significant improve- ment appearing in the business climate.

WILLIAM R. HEWLETT President and Chief Executive Oficer

HP's role in scientific measurement Thousands of years ago, man discovered the triad-time, distance and mass-

upon which all physical measurement is based. Using such crude tools and standards as the thickness of a thumb, the length of a forearm and the shadow thrown by a stick, he was able to plot his land, gauge the length of his travels and build the great pyramids. In later generations, observations made possible by the development of more precise, calibrated instruments served Galileo, Kepler and other scientists in postulating the elemental laws of the interactions of the earth and the planets.

In the 18th and 19th centuries, the demands of the Industrial Revolution hastened the development of even more exacting measurement tools and techniques. Then, shortly thereafter, a series of fundamental insights into the relationships be- tween electric and magnetic fields, emanating from such scientists as Faraday, Gauss and Maxwell, led to the discovery of the electron.

As modern man learned to manipulate the electron, he discovered how to light his homes, power his machines and communicate instantly with people across the world. He learned, too, to use electronics to make measurements of unparalleled precision and usefulness.

Electronic measurement-Hewlett-Packard's business-not only serves elec- tronics itself, it is an essential tool pf science and industry.

Most physical quantities can be converted to elec- trical signals, and, once in this form, they may be precisely measured, analyzed and manipulated. Since its inception in 1939, HP has contributed signifi- cantly to electronic measurement with instruments designed to perform these exacting tasks.

The more than 2,000 products in the company's catalog include devices that measure voltage, resis- tance, current, frequency, power or other electrical quantities. Stimulus instruments such as pulse and signal generators also represent a major part of HP's product line. They provide known signals to other de- vices so that the performance of these devices can be effectively measured and analyzed.

As the measurement needs of our technically-ori- ented society have become more complex, so have the products to serve them. Instruments have been com- bined to make many measurements simultaneously or in series. And, as part of the evolutionary process, their accuracy has been increased significantly.

If called upon, HP instruments can measure and record events occurring forty billion times a second, intervals as short as one-thirtieth of a billionth of a second, amounts as mall as a millionth of a millionth of a gram and a signal whose strength is only one- billionth of a volt.

This information is now produced so rapidly and in such vast quantities that high-speed computing

equipment is often needed to process it and make it more meaningful, As a result, an important use of Hewlett-Packard computers and calculators is to in- teract with one or several instruments, gathering and analyzing measurement data. These same data prod- ucts, operating alone or as part of large systems, also serve the computational needs of customers outside the field of measurement.

Applying its computer technology to the design of instruments, the company is producing new genera- tions of test and measurement equipment with built-in control and computational capability. These instru- ments interpret their own findings to present meaning- ful information in a useful format.

HP has also begun to tie instruments together into large automated test and measurement systems, often incorporating minicomputers to provide analysis and control. The complex systems may include thirty or more HP products from seven or eight different divisions. Smaller systems might include a feva instru- ments and a programmable calculator with a plotter and printer.

Automated systems, useful in checking c cated electronic equipment, running pollution s sib process control and a variety of other applicatrons, represent the company's most recent step in fulfilling man's growing measurement needs.

New digital voltmeter, widely-used test tool, rneaswes and displays ac and dc voltages.

Testing and maintenance of large computer systems are among the many applications of HP's versatile, high-frequency oscilloscopes.

t HP minicomputers, programmed with appropriate software, are finding increasing epplication in science, industry, business and education.

Throughout the world, HP has more than 50,000 A spectrum analyzer used in the quality control active customer accounts in such fields as science, section of a major appliance manufacturer assists the medicine, education, engineering, research and indus- firm in measuring and controlling undesired radiation try. Perhaps the best way to characterize the com- emission from television sets. pany's role in electronic measurement and analysis is to chronicle some of the ways in which these cus- 17 A computerized catheterization system helps a tomers use HP products: doctor diqgnose the condition of a critically ill cardiac

patient by accurately monitoring and recardiig blood pressure, heart rate and other physiological functions. Elsewhere, in an intensive care unit, an HP system warns a nurse of fluctuations in the bodily rhythms of a patient in time for effective remedial action.

Two thousand feet below the surface of the Pa- cific Ocean, the sensor of an HP quartz thermometer provides scientists with periodic readings of tempera- ture changes-as small as one ten-thousandth of a degreein hidden ocean currents.

Nuclear scientists put a mult ichwl analyzer and, calculator to work to characterize radioactive emissions from an atomic power plant,, assuring its continued safe operation.

HP instruments accumulate and tiw from soil sample analyses to enhance an researcher's studies.

Astrophysicists use a p u p of HP ins to help unlock the secrets of pulsars, supernovas an other celestial phenomena.

[7 computer^ loudness analymrs measure the sounds of jet aircraft, i&nti£ying those planes that exceed standards, while small, baary-powered ana- lyzers measure the sound bvels of a factory manufac- turing area to determine whether they are within acceptable limits. I

An HP clock* W g its measurement .of time on the atomic resonance of cesium, calibrates naviga- tional systems that accurately guide ships and aircraft. ,

[7 HP computers assist students in learning mathe- matics, and, by spwdbislg otherwise tedious calcula-ula , tions, free classroom time for more meanmghl in- depth instruction.

[7 A gas chromatograph/mass spectrometer combi- 1

Conductor fault loc+ator serves as an extremely useful maintenance tool by pinpointing

leaks and shorts in telecommunication lines.

nation rapidly identifies a chemical in the blood of a man brought unconscious to a hospital emergency unit. Prompt diagnosis enables proper treatment to begin immediately. In other laboratories, gas chro- matographs measure the amounts of pollutants in automobile exhausts and identify the nature and quan- tity of undesirable substances in foodstuffs.

[7 Large, automated test systems measure and ana- lyze the performance of complex electronic packages in jet aircraft and report the type and location of any malfunctions. On-board analysis of flight tests is made with a portable, programmable HP calculator.

Reliable HP diodes and other solid-state compo- nents serve as key elements in the communications systems of U.S. manned space exploration missions. Similar devices aid the gowing community antenna television industry in providing trouble-free communi- cations service.

HP signal analyzers measure the quality and characteristics of a wide variety of opti& lenses.

Fourier analyzers tell engineers whether tele- H P multichannel analyzer and calculator monitor phone lines can accommodate high quality video sig- radioactive emissions from nuclear energy sources nals for transcontinental transmission. In neurophysi- assure safe operation. ological research, the same analyzers help doctors study responses to external stimuli of patients who are under the influence of various drugs.

HP instruments scan the radio spectrum to detect unauthorized uses of channels allocated to police, fire md other emergency communications networks.

;7 Cable and conductor fault testers pinpoint the location of tiny leaks and disruptive shorts in vital telecommunications lines.

A sophisticated HP computing counter, coupled with a laser system, assists in the safe docking of huge oil tankers. The counter computes the speed of the tanker, its distance and attitude in relation to the dock and continuously displays this information to the pilot.

These brief glimpses only touch upon the contri- butions of Hewlett-Packard to measurement and the pervasive contributions of measurement to our daily lives.

I,.

Computerized cardiac catheterization systems aid doctors in the prompt diagnosis and treatment of critically ill heart patients.

Rapid, accurate analysis of drugs, pesticides, blood samples and countless other substances is enhanced with a gas chromatograph/rnass spectrometer system.

Sophisticated solid-state devices, integrated cir- cuits and hybrid microcircuits are the elemental build- ing blocks of complex electronic instrumentation. They have made possible today's compact, economi- cal and extremely reliable measuring and data process- ing instruments.

Increasingly, to fill its needs, Hewlett-Packard is designing and manufacturing its own highly engi- neered components. By doing so, the company is able to exercise additional controls in the design and de- velopment of its instruments and systems.

Hewlett-Packard has demonstrated industry leadership in developing solid-state photoconductor devices, step recovery and PIN diodes, MOS tech- nology, monolithic integrated circuits and light-emit- ting diodes. Components such as these, developed initially for HP instruments, can now be produced- to exacting quality standards-in high volume. Con- sequently, the company today is providing reliable solid-state devices in large quantities to outside cus-

tomers-establishing itself in a new, important market. These internal capabilities also have a synergistic

effect. The creation of an integrated circuit, for ex- ample, may lead to the development of an instrument that provides more functions at lower cost, a higher degree of reliability, and a smaller, more convenient size. On the other hand, the introduction of an instru- ment by one division may give another the tool it needs to produce a new instrument of its own.

This structured, interactive background for tech- nological development has also made it possible for the company to design many of the specialized tools needed during the manufacturing and testing phases of its own products. These range from highly special- ized equipment used in the fabrication of component parts to automated test systems for continuous and consistent reliability checks of finished products. The systems have had an added benefit, in that their suc- cessful performance has helped establish the company as a leader in custom designed systems for outside sale.

Advanced microcircuit technology enables HP to reduce the size and cost of instruments, at the same time increasing their reliability and usefulness.

Products and techologies of many H P divisions come together in large systems for automat$ testtng d measurement.

Land surveys are speeded and simplified with HP's new distance meter. Instrument uses invbible light beam to measure up to two miles with extreme accuracy.

And what of the future?

Hewlett-Packard is finding increasing opportuni- ties to expand its existing markets and to enter im- portant new ones. The following is a sampling of recently introduced products that are moving the com- pany into new areas beyond HP's traditional fields of interest: . For the civil engineering field, HP has introduced

a light weight, inexpensive but rugged surveying in- strument that uses an invisible light beam to measure distances rapidly and accurately.

For applications in which positioning to minute

Laser interferometer is used in the precise calibrafion and positioning of machine tools, and in other applications requiring millionths-of-an-inch precision.

metry and instrument calibration-the company now offers a laser interferometer that provides accuracy to within millionths of an inch.

HP" new light-emitting diode arrays provide long-lasting letter/symbol/numeral readouts for in- struments, computers, meters and watches.

In anothw engineering advance, the company has introduced a solid-state device designed to detect motion or measure velocity. It is expected to play a significant role in safety, security and navigation systems.

And so Hewlett-Packard continues to expand the ways in which the basic triad-time, distance and mass -can be em~loved to take the measure of our universe.

CONSOLIDATED FINANCIAL POSITION October 31,1970 and 1969

ASSETS

1970 1969 (Thousands of dollars)

Cash and marketable securities . . . . . . . . . . . . Notes and accounts receivable, less provision for losses in

collection (1970-$332, 1969-$197) . . . . . . . . . . Inventories:

Finished goods and work in process, at approximate cost . . . . . . . . . . . . . . .

. . . . . . . . Raw materials, at lower of cost or market

. . . . . . . . . . . . Deposits and prepaid expenses

PROPERTY, PLANT AND EQUIPMENT AT COST:

. . . . . . . . . . . . . . . . . . . . Land

Buildings, equipment and other, net . . . . . . . . . . . .

OTHER ASSETS AND DEFERRED CHARGES:

Securities, at cost . . . . . . . . . . . . . . . . . Deferredresearchanddevelopmentexpenses,net . . . . . . . . Patents and trademarks, net . . . . . . . . . . . . . .

. . . . . . . . . . . . . Deposit on leasehold and other

HEWLETI'-PACKARD COMPANY

LIABILITIES AND SHAREOWNERS' EQUITY

1970 1969

(Thousands of dollars)

Notes payable . . . . . . . . . . . . . . . . . . 25,623 20,501

Accounts payable and accruals . . . . . . . . . . . . . 31,857 35,661

. . . . . . . . Provisionforfederalandforeigntaxesonincome 7,330 1 1,054

. . . . . . . . . . . . TOTAL CURRENT LIABILITIES 64,810 67,216

SHAREOWNERS' EQUITY:

,_r@ommon stock, par value $1 a share:

1970 1969

(Stated in shares)

Authorized . . . . . . . . . 40,000,000 15,000,000

Reserved for: Stock options . . . . . . . . 789,056 416,521

Employee stock purchase . . . . . . . and award plans 1,048,861 160,612

Issued and outstanding . . . . . . 25,649,111 12,649,73 1 25,649 12,650

Capital in excess of par value . . . . . 33,297 36,134

Retained earnings . . .

. . . . TOTAL

The accompanying notes t o financial statements (page 19) are an ir~tegral part hereof.

HEWLE'IT-PACKARD COMPANY

CONSOLIDATED STATEMENT OF INCOME For the years ended October 31,1970 and 1969

Sales, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of goods sold . . . . . . . . . . . . . . . . . . Gross profit on sales

. . . . . . . . . . . . . Research and development expense Selling expense . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . Administrative and general expense Total expense . . . . . . . . . . . . . . . . . .

Net profit from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income, net

Net income before provision for taxes on income . . . . . . . . . . Provision for federal and foreign taxes on income . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . Net income per share

Costs and expenses above include depreciation and amortization 1970-$13,708; 1969-$11,073

CONSOLIDATED STATEMENT OF CAPITAL IN EXCESS OF PAR VALUE AND RETAINED EARNINGS For the years ended October 31,1970 and 1969

CAPITAL IN EXCESS OF PAR VALUE:

Balance, beginning of year . . . . . . . . . . . . . . Add: excess of market value or proceeds received over

par value of capital stock issued under stock purchase and stock option plans, and other items less expenses in connection with issuance of capital stock . . . . . . . .

. . . Less: transfer to common stock regarding two-for-one stock split Balance, end of year . . . . . . . . . . . . . . . .

RETAINED EARNINGS : Balance, beginning of year . . . . . . . . . . . . . . Add : net income . . . . . . . . . . . . . . . . .

Less: dividends paid . . . . . . . . . . . . . . . . Balance, end of year . . . . . . . . . . . . . . . .

The accompanying notes to financial statements are an integral part hereof.

1970 1969 (Thousands of dollars)

347,322 323,780

1970 1969 (Thousands of dollars)

HEWLETT-PACKARD COMPANY

1 NOTES TO FINANCIAL STATEMENTS ( October 31,1970

( I . Principles o f consolidation The consolidated financial statements include ac-

counts of the company and all of its domestic and foreign subsidiaries.

Foreign currencies have been translated into U.S. dollars at rates considered appropriate. Net assets of the foreign subsidiaries amounted to $27,503,200 at October 31, 1970.

It is anticipated that the accumulated earnings of the foreign subsidiaries will be required for use in their opera- tions and, therefore, appropriate provision has not been made for U.S. income taxes which would accrue upon the return of such earnings to the parent company.

( 2 . Property, plant and equipment - .

Buildings, equipment and other, net, is composed of the following:

1970 1969 (Thousands of Dollars)

Buildings 5 1,509 45,539 Machinery and equipment 54,210 44,652 Other 1 3,445 11,541 Construction in progress 4.334 2.289

A - 123,498 104,021

ulated depreciation 42,890 34.948

The methods used by the company and subsidiaries in computing depreciation and amortization include the sum-of-the-years-digits, declining balance and straight line methods.

At October 31. 1970. land and buildines with a E book value of $5 14,560 and' $829.200. resoectiielv. were

3. Pension and profit-sharing retirement plans Contributions to various pension and profit-sharing

retirement plans in 1970 amounted to approximately $5,093,152. The company's policy is to fund essentially all pension and retirement costs accrued.

4. Common stock During 1970, the shareowners approved an amend-

ment to the articles of incorporation increasing the authorized common stock to 40,000,000 shares from 15,000,000 shares and also approved a two-for-one stock split.

Changes in shares of commoil stock outstanding for the year ended October 31, 1970, were as follows:

Balance, November 1, 1969 12,649,73 1 Shares sold or issued for:

Option plans 19,l 11 Employees purchase plan 295,204 Service award plan 5,730 Two-for-one stock solit 12,679.335

Balance, October 3 1, 1970

5 . Employee stock option and purchase plans During prior years, Hewlett-Packard Company re-

served shares of its common stock for stock option plans. Pursuant to these plans, qualified options were or will be granted over a five year period and become exercisable after one year and within five years from date of grant, at the rate of 25 percent a year. The option price was or will be market value at the date of grant.

At October 31, 1970, 789,056 shares of common stock (adjusted for two-for-one stock split) were reserved for issuance under the stock option plans. Of these shares, 615,156 were reserved for options already granted at prices ranging from $17.38 to $53.88 a share. During 1970, additional options for 1,300 shares were granted, options for 19,111 shares were exercised and options for 7,900 shares were cancelled.

During November 1970, the company's board of directors approved a plan (subject to shareowners ap- proval at the annual meeting to be held in February 1971), that non-qualified options be granted in tandem to all holders of qualified stock options outstanding at Feb- ruary 23, 1971, to purchase the shares of stock unexer- cised at the expiration of the qualified options within the following five year period.

Hewlett-Packard Company adopted, in prior years, plans for employees to purchase the company's stock. The plans require the company and participating subsidi- aries to contribute 25 percent of the purchase price (ap- proximate market value) of such stock at the dates of purchase. During 1970, the company reserved an addi- tional 1,000,000 shares of stock for these plans, and at October 3 1, 1970 there remained 997,961 unsold shares.

6. Commitments and contingent liabilities Sales recorded during the years subsequent to Octo-

ber 31, 1965, subject to the U.S. Renegotiation Act of 1951, as amended, remain subject to review. Management believes that when such sales are examined, there will be no refund payable.

Hewlett-Packard Company's federal income tax re- turns for the year ended October 31, 1967, and subse- quent years, remain subject to review by the Internal Revenue Service.

The companies have long-term leases requiring an- nual rental of $920,000 and commitments to their build- ing programs of approximately $5,426,000.

HEWLETT-PACKARD COMPANY

-

TEN-YEAR CONSOLIDATED SUMMARY II) '

(Thousands of dollars except per-sham amounts)

Income Sales, less returns and allcrwances .

. . . . Cbmmission income

Other income . Total .

Income before taxes on income . . Federal taxes on income ,

Foreign taxes on income

Total . - - -

Netincome . . Preferred dividends . .

. . . Net income to common stock

Deductions

Cost of goods sold and operating expense . Research and development expense . . Selling, administrative and pnerd expense . Interest expense . . . . . . . . . .

Total . . . . .

Net income per share of common stock* .

*Based on the shares of common stock outstanding at the end of each year, giving retrmtiue - eflect for the two-for-one stock split Ib Eebruav, 1970 an$ ;far shafeip issued for aequisitiom

acamnted for on the pooling of infer@@ basis.

HEPYLEXT-PACICARD COMPANY

CONSOLIDATED STATEMENT OF SOURCE AND APPLICATION OF FUNDS For the years ended October 31,1970 and 1969

Funds were provided by:

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and other non-cash items

Increase (decrease) in long-term debt . . . . . . . . . . . . Issuance of common stock:

. . . . . . . Stock plans and service awards less issuance expense

Funds were applied to:

. . . . . . . . . Purchase of property, plant and equipment, net

. . . . . . . . . . . . . . Dividends on common stock

Increase in other assets . . . . . . . . . . . . . . . . Purchase of patents and trademarks . . . . . . . . . . . .

. . . . . . . . . . . . . . . Increase in working capital

1970 1969 (Thousands of dollars)

ACCOUNTANTS' REPORT

The Board of Directors Hewlett-Packard Company :

We have examined the consolidated financial position of Hewlett-Packard Company and subsidiaries as of October 31, 1970. and the related statements of income. capital in excess of par value, retained earnings and source and application of funds for the year then ended. Our examination was made in accordance with generally ac-

December 18, 1970 San Francisco, California

cepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

In our opinion, such statements present fairly the financial position of Hewlett-Packard Conlpany and sub- sidiaries as of October 31, 1970, the results of their opera- tions and the source and application of funds for the year then ended in conformity with generally accepted account- ing principles applied on a basis consistent with that of the preceding year.

Main Lafrentz & Co. Certified Public Accountants

HEWLETT-PACKARD COMPANY

CORPORATE OFFICES 1501 Page Mill Road, Palo Alto, California 94304

DOMESTIC OPERATIONS

Manufacturing

Palo Alto, Cupertino, Mountain View, San Diego and Santa Clara, California Colorado Springs and Loveland, Colorado . Waltham, Massachusetts . Berkeley Heights and Rockaway, New Jersey . Avondale, Pennsylvania.

Marketing

Regional headquarters in North Hollywood, California; Atlanta, Georgia; Skokie, Illinois; and Paramus, New Jersey 50 sales offices throughout the United States.

INTERNATIONAL OPERATIONS

Manufacturing *, West Germany . South Queensferry, Scotland . Tokyo, Japan . Singapore.

Marketing

Regional headquarters in Palo Alto, California, and Geneva, Switzerland . 120 sales offices throughout the world.

Transfer agents

Crocker-Citizens National Bank, San Francisco . The Chase Manhattan Bank, New York.

Registrars

Wells Fargo Bank, San Francisco . First National City Bank, New York.

Annual meeting o f shareowners

The annual meeting will be held at 2 P.M., Tuesday, February 23, 1971 at Hewlett-Packard's Santa Clara Division plant, 5301 Stevens Creek Boulevard, Santa Clara, California.

DIRECTORS Luis W. Alvarez

Professor of Physics, University of California Ernest C. Arbuckle

Chairman, Wells Fargo Bank George E Bennett

President, State Street Investment Corporation Robert Minge Brown

Partner: McCutchen, Doyle, Brown and Enersen W. E Cavier

Vice President and Secretary, Hewlett-Packard Company W. D. Eberle

President and Chief Executive Officer, American Standard Inc. * W. Noel Eldred

Executive Vice President, Hewlett-Packard Company John J. B. Fulenwider

Retired Vice President, Hercules, Incorporated William R. Hewlett

President and Chief Executive Officer, Hewlett-Packard Company $Philip R. Lee, M.D.

Chancellor, University of California, San Francisco Medical Center Ralph E. Lee

Executive Vice President, Hewlett-Packard Company Edmund W. Littlefield

President and General Manager, Utah Construction & Mining Co. Francis L. Moseley

President, Servo Products Company Thomas E! Pike

Vice Chairman, Fluor Corporation Frederick E. Terman

Vice President and Provost Emeritus, Stanford University Edwin E. van Bronkhorst

Vice President and Treasurer, Hewlett-Packard Company

OFFICERS William R. Hewlett

President and Chief Executive Officer * W. Noel Eldred

Executive Vice President Ralph E. Lee

Executive Vice President Robert L. Boniface

Vice President W. F. Cavier

Vice President and Secretary William E! Doolittle

Vice President Bernard M. Oliver

Vice President, Research and Development Noel E. Porter

Vice President Edwin E. van Bronkhorst

Vice President and Treasurer Ray L. Wilbur, Jr.

Vice President John A. Young

Vice President

*Deceased November 30,1970 $Resigned December, 1970

HEWLETT :-%p PACKARD M